Zynga weighed down by Facebook, lockup

Flood of new shares may hit the market as usage stats show decline

By

DanGallagher

SAN FRANCISCO (MarketWatch) — Zynga Inc.’s shares have set new all-time lows this week, as the social-game maker has been hit with the double-whammy of its close association with Facebook Inc. and the prospect of millions of new shares coming onto the market next week.

The maker of popular games such as “FarmVille” and “CityVille,” Zynga
ZNGA, -1.38%
has seen its share price tumble more than 19% since the opening bell last Friday, when the first trades on Facebook Inc.
FB, -1.82%
kicked off following the social network’s initial public offering.

At last check, Zynga shares were trading down more than 3% at $6.85 by early Thursday afternoon.

That has more than erased the gains the stock enjoyed on an upside run in early February, when Facebook’s
FB, -1.82%
first IPO filing sparked interest in Zynga — given its role as the social network’s most important revenue contributor, outside of its core advertising business. Zynga’s shares surged by more than 40% over the following month.

Facebook finally made its debut last Friday, and for reasons unrelated to Zynga, that offering has become one of the year’s most notable flops, with the shares making only a fractional gain on their first day and then falling for most of this week. By midday Thursday, Facebook’s stock was trading around the $32 mark — down nearly 16% from its IPO price.

In addition, the Facebook offering has been dogged by controversy and concerns about the company’s growth, which reportedly caused the deal’s main underwriters to cut their revenue forecasts just days before the offering. Those concerns also can be read through to Zynga, which generates substantially all of its revenues from the Facebook platform.

Zynga’s “CityVille” social game

“They are irrevocably linked to Facebook’s user growth (which hasn’t slowed), and anything that hurts Facebook will be perceived as hurting Zynga,” said Michael Pachter of Wedbush Securities.

The analyst added that “it doesn’t help” that Zynga’s monthly active users have fallen by nearly 12% to 248.4 million over the last 30 days, according to AppData.

Colin Sebastian of Robert W. Baird agreed that the recent weakness in Zynga’s shares “mostly has to do with Facebook, the IPO and slowing growth on Facebook.” He also pointed to concerns about “how Zynga monetizes the shift to mobile,” as the majority of the company’s revenue still comes from small transactions made over its Facebook games.

Both Pachter and Sebastian and several other analysts said that the expiration of the company’s post-IPO share lockups will make a significant amount of Zynga’s shares eligible to sell on the market, starting next week.

Zynga will have about 325 million shares free from their lockup on Tuesday, May 29, from “nonemployee stockholders” that did not participate in the company’s earlier secondary offering.

Two other chunks of 50 million shares and 150 million shares will emerge from the lockup on July 6 and Aug. 16, respectively, from board members and company executives, according to Zynga’s SEC filings.

The company currently has about 736 million shares outstanding, meaning its share count could increase by more than 70% over the next three months, though not all those shareholders may elect to sell at the currently depressed price.

The effect of post-IPO lockups on stocks is unclear. Theoretically, a flood of new shares hitting the market can depress prices, based on the dynamics of supply and demand.

However, in a report Thursday, Susquehanna analyst Herman Leung analyzed the performance of several new Internet stocks before and after their lockups expired. While share prices saw a decline of about 3% following their lockup expiration, Leung found that the group averaged no significant change from one month before the expiration to one month after.

“We were a bit surprised at such little impact, on average, these lockups have had,” he wrote, noting that his sample set was small.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.